Frankel Ltd., a British merchandising company, is the exclusive distributor of a product that is

Frankel Ltd., a British merchandising company, is the exclusive distributor of a product that is gaining rapid market acceptance. The company’s revenues and expenses (in British pounds) for the last three months are given below:

Frankel Ltd. Comparative Income Statements For the Three Months Ended June 30
		April				May			June
Sales in units		3,000				3,750			4,500
Sales revenue		£ 420, 000				£ 525,000			£ 630,000
Cost of goods sold		168,000				210,000			252,000
Gross margin		252,000				315,000			378,000
Selling and administrative expenses:
Shipping expense		44,000				50,000			56,000
Advertising expense		70,000				70,000			70,000
Salaries and commissions		107,000				125,000			143,000
Insurance expense		9,000				9,000			9,000
Depreciation expense		42,000				42,000			42,000
Total selling and administrative expenses		272,000				296,000			320,000
Net operating income (loss)		£  (20,000)				£  19,000			£  58,000

(Note: Frankel Ltd.’s income statement has been recast in the functional format common in the United States. The British currency is the pound, denoted by £.)

Required:
1.	Identify each of the company’s expenses (including cost of goods sold) as either variable, fixed, or mixed.

Expenses	Classification
Cost of goods sold	Variable
Shipping expense	Mixed
Advertising expense	Fixed
Salaries and commissions	Mixed
Insurance expense	Fixed
Depreciation expense	Fixed

2.	Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense. (Omit the "£" sign in your response.)

     

	Variable Cost		Fixed Cost	Formula
Shipping expense	£	per unit	£	Y = £	+	£  X
Salaries and commissions	£	per unit	£	Y = £	+	£  X

3.	Redo the company’s income statement at the 4,500-unit level of activity using the contribution format. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "£" sign in your response.)

Frankel Ltd. Income Statement For the Month Ended June 30
Sales revenue		£
Variable expenses:
Cost of goods sold	£
Shipping expense
Sales commissions
Contribution margin
Fixed expenses:
Shipping expense
Advertising expense
Sales salaries
Insurance expense
Depreciation expense
Net operating income		£

Explanation:

2. 

Analysis of the mixed expenses:

	Units	Shipping Expense	Salaries and Commissions
High level of activity	4,500	£56,000	£143,000
Low level of activity	3,000	44,000	107,000
Change	1,500	£12,000	£ 36,000

  

Variable cost element:

Variable cost per unit  =	Change in cost
	Change in activity

Shipping expense:	=	£12,000	= £8 per unit
		1,500 units

Salaries and commissions:	£36,000	= £24 per unit
	1,500 units

Fixed cost element:

	Shipping Expense			Salaries and Commissions
Cost at high level of activity	£	56,000		£	143,000
Less variable cost element:
4,500 units × £8 per unit		36,000
4,500 units × £24 per unit					108,000
Fixed cost element	£	20,000		£	35,000

The cost formulas are:

Shipping expense: £20,000 per month plus £8 per unit or

Y = £20,000 + £8X.

Salaries and Commissions: £35,000 per month plus £24 per unit or

Y = £35,000 + £24X.

3.

Cost of goods sold: (4,500 units × £56 per unit) = £252,000

Shipping expense: (4,500 units × £8 per unit) = £36,000

Sales commissions: (4,500 units × £24 per unit) = £108,000

The Central Area Well-Baby Clinic provides a variety of health services to newborn babies and their

The Central Area Well-Baby Clinic provides a variety of health services to newborn babies and their parents. The clinic is organized into a number of departments, one of which is the Immunization Center.

Required:

A number of costs of the clinic and the Immunization Center are listed below. For each cost listed below, indicate whether it is a direct or indirect cost of the Immunization Center, whether it is a direct or indirect cost of immunizing particular patients, and whether it is variable or fixed with respect to the number of immunizations administered.

Item	Description	Direct or Indirect Cost of the Immunization Center	Direct or Indirect Cost of Particular Patients	Variable or Fixed with Respect to the Number of Immunizations Administered
Example	The cost of polio immunization tablets	Direct	Direct	Variable
a.	The salary of the head nurse in the Immunization Center.	Direct	Indirect	Fixed
b.	Costs of incidental supplies consumed in the Immunization Center, such as paper towels.	Direct	Indirect	Variable
c.	The cost of lighting and heating the Immunization Center.	Direct	Indirect	Fixed
d.	The cost of disposable syringes used in the Immunization Center.	Direct	Direct	Variable
e.	The salary of the Central Area Well-Baby Clinic's information systems manager.	Indirect	Indirect	Fixed
f.	The costs of mailing letters soliciting donations to the Central Area Well-Baby Clinic.	Indirect	Indirect	Fixed
h.	The cost of medical malpractice insurance for the Central Area Well-Baby Clinic.	Indirect	Indirect	Fixed
i.	Depreciation on the fixtures and equipment in the Immunization Center.	Direct	Indirect	Fixed

House of Organs, Inc., purchases organs from a well-known manufacturer and sells them at the retail

House of Organs, Inc., purchases organs from a well-known manufacturer and sells them at the retail level. The organs sell, on the average, for $2,500 each. The average cost of an organ from the manufacturer is $1,500. The costs that the company incurs in a typical month are presented below:

Costs	Cost Formula
Selling:
Advertising	$950 per month
Delivery of organs	$60 per organ sold
Sales salaries and commissions	$4,800 per month, plus 4% of sales
Utilities	$650 per month
Depreciation of sales facilities	$5,000 per month
Administrative:
Executive salaries	$13,500 per month
Depreciation of office equipment	$900 per month
Clerical	$2,500 per month, plus $40 per organ sold
Insurance	$700 per month

During November, the company sold and delivered 60 organs.

Required:
1.	Prepare a traditional income statement for November. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

House Of Organs, Inc. Traditional Income Statement For the Month Ended November 30
Sales		$
Cost of goods sold
Gross margin
Selling and administrative expenses:
Selling expenses:
Advertising	$
Delivery of organs
Sales salaries and commissions
Utilities
Depreciation of sales facilities
Total selling expenses
Administrative expenses:
Executive salaries
Depreciation of office equipment
Clerical
Insurance
Total administrative expenses
Total selling and administrative expenses
Net operating income		$

2.	Prepare a contribution format income statement for November. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

House Of Organs, Inc. Contribution Format Income Statement For the Month Ended November 30
	Total	Per unit
Sales	$	$
Variable expenses:
Cost of goods sold
Delivery of organs
Sales commissions
Clerical
Total variable expenses
Contribution margin		$
Fixed expenses:
Advertising
Sales salaries
Utilities
Depreciation of sales facilities
Executive salaries
Depreciation of office equipment
Clerical
Insurance
Total fixed expenses
Net operating income	$

Explanation:

1.

Sales: (60 organs × $2,500 per organ) = $150,000

Cost of goods sold: (60 organs × $1,500 per organ) = $90,000

Delivery of organs: (60 organs × $60 per organ) = $3,600

Sales salaries and commissions: [$4,800 + (4% × $150,000)] = $10,800

Clerical: [$2,500 + (60 organs × $40 per organ)] = $4,900

2.

Sales: (60 organs × $2,500 per organ) = $150,000

Cost of goods sold: (60 organs × $1,500 per organ) = $90,000

Delivery of organs: (60 organs × $60 per organ) = $3,600

Sales commissions: (4% × $150,000) = $6,000

Clerical: (60 organs × $40 per organ) = $2,400

Haaki Shop, Inc., is a large retailer of surfboards. The company assembled the information shown

Haaki Shop, Inc., is a large retailer of surfboards. The company assembled the information shown below for the quarter ended May 31:

	Amount
Total sales revenue	$	800,000
Selling price per surfboard	$	400
Variable selling expense per surfboard	$	50
Variable administrative expense per surfboard	$	20
Total fixed selling expense	$	150,000
Total fixed administrative expense	$	120,000
Merchandise inventory, beginning balance	$	80,000
Merchandise inventory, ending balance	$	100,000
Merchandise purchases	$	320,000

Required:
1.	Prepare a traditional income statement for the quarter ended May 31. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Haaki Shop, Inc. Traditional Income Statement
Sales		$
Cost of goods sold
Gross margin
Selling and administrative expenses:
Selling expenses	$
Administrative expenses
Net operating income		$

2.	Prepare a contribution format income statement for the quarter ended May 31. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Haaki Shop, Inc. Contribution Format Income Statement
Sales		$
Variable expenses:
Cost of goods sold	$
Selling expenses
Administrative expenses
Contribution margin
Fixed expenses:
Selling expenses
Administrative expenses
Net operating income		$

3.	What was the contribution toward fixed expenses and profits for each surfboard sold during the quarter? (Omit the "$" sign in your response.)

Contribution of each surfboard was

$

Explanation:

1.

Cost of goods sold: ($80,000 + $320,000 – $100,000) = $300,000

Selling expenses: (($50 per unit × 2,000 surfboards*) + $150,000) = $250,000

Administrative expenses: (($20 per unit × 2,000 units) + $120,000) = $160,000

*$800,000 sales ÷ $400 per surfboard = 2,000 surfboards.

2.

Cost of goods sold: ($80,000 + $320,000 – $100,000) = $300,000

Selling expenses: ($50 per unit × 2,000 surfboards) = $100,000

Administrative expenses: ($20 per unit × 2,000 surfboards) = $40,000

3.

Since 2,000 surfboards were sold and the contribution margin totaled $360,000 for the quarter, the contribution of each surfboard toward fixed expenses and profits was $180 ($360,000 ÷ 2,000 surfboards = $180 per surfboard).